Online VAT fraud and error costs UK dearly

A report published by the National Audit Office (NAO) estimates that online VAT fraud and error costs the UK somewhere between £1bn and £1.5bn in lost tax revenue during the 2015/16 financial year.

Under current UK tax rules, any traders based outside the European Union (EU) who sell goods to UK customers over the internet are supposed to charge VAT if the goods are already in the UK at the point of sale.

In many cases, overseas sellers will export their goods to the UK to be stored in ‘fulfilment houses’ before they are sold through online marketplaces such as eBay and Amazon.

However, Whitehall’s spending watchdog says that an increasing number of such sellers are not paying the appropriate sales tax on such items, and the UK is losing out significantly as a result – particularly as online sales accounted for 14.5 per cent of all UK retail sales in 2016.

Similar concerns have been raised in the past, and online marketplaces such as eBay and Amazon insisted that a lack of awareness was the key problem.

Both companies have since introduced new measures to ‘educate’ traders on VAT trading and compliance, but the NAO’s report suggests that HM Revenue & Customs (HMRC) has so far been unable to determine what proportion of 2016/17’s VAT losses were down to lack of awareness, technical error, or outright fraud.

The NAO has also suggested that warehouses operated by some prominent traders are being targeted by organised criminals in China and the UK to facilitate the handling of misclassified and undervalued goods.

To date, there have been no prosecutions for online VAT fraud, but HMRC has said that fulfilment houses across the UK – of which it estimates there could be anywhere between 500 and 3,000 – now form the primary focus of its ongoing compliance efforts.

Meg Hillier, chair of the public accounts committee, has called on HMRC to “finally step up and act to confront this growing [VAT fraud] problem”.

She labelled the issue “a double whammy for taxpayers,” and said that “overseas sellers who avoid VAT” are “hitting British jobs” by undercutting “the prices charged by small, law-abiding British businesses”.

In September 2016, new legal powers were introduced ensuring that online marketplaces can now be held jointly liable for non-payment of VAT in instances where they have been informed of an issue with a seller.

HMRC has estimated that such powers “will secure £875m for the UK taxpayer”.